Lessons from a VIX trade

I sold my VIX ETF yesterday. It was interesting to watch that index spike into the 20+ range from a low of 13, which is the level I had been looking for. But a valuable lesson came out of this play – for me – anyhow. The problem with VIX ETF’s is the contango effect. This is essentially the erosion of the ETF’s price over time as VIX contracts are rolled. Premiums for time and cost inefficiencies all eat into the value of this type of ETF. Thus, despite my rather accurate call in April on this blog to buy a VIX ETF as that index hit 13 (which I did), and sell if and when the index went over 18 (which I did intraday yesterday at VIX 21), I still lost about 8% on the trade.

vix short


Yes, I was aware of the contango effect when I bought the ETF. History suggests that the VIX tends to move violently up and down—thus, you can usually play this trade over a short period with little contango effect.  if you observe the chart above- you will note that after my buy point in early April, the VIX index experienced an unusually long period of sideways movement. As noted on my original blogs, the VIX tends not to stand still for long. This time—it did stay still (relatively speaking). It went  range bound between 13-15 for almost 3 months, before finally spiking over 20 yesterday. In the world of stock trading –  where contango does not exist – waiting 3 months for a nice breakout like this one is fine. In the world of time erosion and cost inefficiencies such as with the VIX ETF’s rolling of futures contracts—a 3 month wait to be proven “right” is not an option. Conclusion: I was right that VIX levels of 13 were bottoming, and wrong on the time it would take that level to spike up to its topping zone.


Would I trade this ETF strategy again? Absolutely! Three month super-tight sideways movements are rare for the VIX—note the rarity of such events on the chart. Typically, you can get in and out on a spike within a month of trading the VIX. A short turnaround like that will normally not erode too much of an ETF through contango. While there is always the potential for another price-eroding low volatility period on my next VIX trade (which again would be executed anywhere near a VIX level of 12 or so) – the odds are usually good for a rapid and potentially profitable spike at that level.


For those interested, we continue to maintain a 6% weighting in inverse ETF’s, a 3% weighting in gold, and a 33% weighting in cash. The balance of our equity is largely low beta.



  • Thanks again Keith for the honest update. Helps me a great deal to understand what and why. Am also 26% cash and low beta although my low beta is more permanent than yours may be.

  • Being right and making profits are not correlated. I have experienced this a lot. I was able to make a bit of profit on that market move downward into May, and have another inverse market position that I entered on June 14.

    Because of the problems of contango and bear ETF inefficiencies, I try not to hold them very long (unless as a hedge). This usually results in either taking profits too early or I exit the position quickly when it’s not working, and then I get “proven right” afterward without profiting.

    Simple but not easy.

    • If it was easy the market would be flat forever.
      The volatility and randomness intermixed within levels of predictability based on pattern recognition and market valuation techniques create the swings that provide opportunities, and losses.

  • Hi Keith, for what it’s worth, the 52 week highs as reported by StockCharts this morning show 52 issues. Wow! But 32 of those were gold issues and the rest bond ETFs.

    Risk off or what?

    • Kool!
      thanks Fred–markets like to go big or go home–all in, or run for the hills.


    • JP–the VIX is a crazy index t try to predict too exactly–ie hard to say exactly where it may top or bottom. All I know is that there is a tenancy for the VIX to bottom anywhere near 12. It has on a few rare occasions gone to 10–but those were historic all-time lows. Its also typically turned down any time after it hits 18-28 — thats a broad range but thats the nature of this beast. Again–it has historically only gone over 38 about half a dozen times. So to play the odds–best to try and buy near 12, sell around 20
      I’ve discussed long termed patterns on the VIX and market the trading zones before, including on my April 20th 2016 blog: https://www.valuetrend.ca/what-vix-trends-might-be-telling-us/

  • Keith,
    Are you still holding Hdge? What would be the sell point?
    What do you think about BMO ZPW? Which ETF is better as a hedge?
    Do you see gold and silver going still higher over the summer months based on the technicals? Gold briefly traded above $1,300 today (although both metals had a pullback later)
    Thank you

    • We no longer hold VIX securities, but hold 6% inverse/short against the S&P500
      We are just under 30% cash in addition to that, along with a focus on lower beta stocks.
      We sold our gold the other day and I will blog on that Monday
      ZPW is not a hedge–in fact, given that they write puts-it is a bullish bet. Better to be writing calls if you think markets will fall, or choose an appropriate ETF strategy that writes call to at least dampen downside somewhat.

  • Hi Keith,
    I still have my shares in HUV. Would you wait for more volatility before selling it? I know that there is erosion in time value. Do you think that there will be enough volatility for some spikes in volatility in the short term? Thanks.

    • hard to say John–the VIX moved into the range that I expected it would–although as you note, the HUV was affected by time value erosion so I ended up, even with a well executed buy/sell timing on the VIX itself–with a small loss. I would say perhaps wait to Friday and then go from there–VIX is in the middle of the range now, so no telling which way it will spring from here…


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